Goldman Sachs "Systems Failure" - How does money just disappear?

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Annals of Goldman Sachs client relations, Michael Lewis edition

Felix Salmon | March 1st, 2010 at 3:25 pm

Vanity Fair has a long excerpt from Michael Lewis’s excellent new book, The Big Short. The excerpt follows Michael Burry, a hedge-fund investor who was almost too early getting short the subprime housing market, and who managed to annoy his investors mightily despite making them millions of dollars.

The excerpt includes a pretty scandalous tale about how Wall Street banks treated their clients when it came to providing them with reliable marks. But is it true? Here’s what Lewis writes:

In the spring of 2007, something changed—though at first it was hard to see what it was. On June 14, the pair of subprime-mortgage-bond hedge funds effectively owned by Bear Stearns were in freefall. In the ensuing two weeks, the publicly traded index of triple-B-rated subprime-mortgage bonds fell by nearly 20 percent. Just then Goldman Sachs appeared to Burry to be experiencing a nervous breakdown. His biggest positions were with Goldman, and Goldman was newly unable, or unwilling, to determine the value of those positions, and so could not say how much collateral should be shifted back and forth. On Friday, June 15, Burry’s Goldman Sachs saleswoman, Veronica Grinstein, vanished. He called and e-mailed her, but she didn’t respond until late the following Monday—to tell him that she was “out for the day.”

“This is a recurrent theme whenever the market moves our way,” wrote Burry. “People get sick, people are off for unspecified reasons.”

On June 20, Grinstein finally returned to tell him that Goldman Sachs had experienced “systems failure.”

That was funny, Burry replied, because Morgan Stanley had said more or less the same thing. And his salesman at Bank of America claimed they’d had a “power outage.”

“I viewed these ‘systems problems’ as excuses for buying time to sort out a mess behind the scenes,” he said. The Goldman saleswoman made a weak effort to claim that, even as the index of subprime-mortgage bonds collapsed, the market for insuring them hadn’t budged. But she did it from her cell phone, rather than the office line. (Grinstein didn’t respond to e-mail and phone requests for comment.)

The whole point of being a broker-dealer is that you should be willing to make a two-way market and provide vaguely reliable marks in just about anything — rather than fall off the face of the planet for a week just when you’re needed most.

This story makes Goldman Sachs in particular look particularly bad — the bank which prides itself on superior risk management and being a provider of liquidity to the markets is now coming up with ludicrous excuses about “systems failure” and making furtive calls on an unrecorded cellphone trying to spin a highly-improbable tale that it doesn’t need to provide any more collateral because honestly the market isn’t crashing around its ears, the visible implosion of the Bear Stearns hedge funds notwithstanding.

But I’ve spent a chunk of this morning on the phone to Goldman Sachs, and they say the story isn’t true...

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The story of Goldman disappearing for a few days ties into Lewis’s bigger theory of what was going on at the time: that Goldman was net long the subprime market as late as June 2007, and then rushed to get short only when the Bear Stearns funds collapsed. A bit later in the book, Lewis has this footnote:

The timing of Goldman’s departure from the subprime market is interesting. Long after the fact, Goldman would claim it had made that move in December 2006. Traders at big Wall Street firms who dealt with Goldman felt certain that the firm did not reverse itself until the spring and early summer of 2007, after New Century, the nation’s biggest subprime lender, filed for bankruptcy. If this is indeed when Goldman “got short,” it would explain the chaos in both the subprime market and Goldman Sachs, perceived by Mike Burry and others, in late June. Goldman Sachs did not leave the house before it began to burn; it was merely the first to dash through the exit — and then it closed the door behind it.

read more here http://www.ethiopianreview.com/news/11238

How is this meshed with AIG? All those counterparty agreements?

Is there a paper trail with two dates? Did Goldman rewrite history with AIG?

When will AIG and the Feds books get a good robust audit?

Taxpayer face generational debt, and Goldman pays record bonuses.

Was Bush resistant to bailing out Wall Street?

If they knew in 2007 that the house of cards was collapsing, what did they do with that knowledge?